In real estate investment, you’ll often hear that investing in property is always profitable. However, not all types of properties can be profitable for you. There are 3 indicators that will determine whether the property you’re about to invest in will bring you profit or not.
Real Estate Investment Indicator 1: Property Rental Cash Flow
Rental cash flow means the balance of your property’s rental income after deducting monthly property installments, utilities, land tax, property tax, maintenance charges, and others. In the real estate world, there are two categories of rental cash flow: positive and negative rental cash flow.
Positive rental cash flow occurs when your property’s rental collection is higher than the monthly installments and other costs involved in maintaining your property. In this situation, you gain profit from renting out your property. This should be your main target when you start real estate investment.
Negative rental cash flow occurs when your property’s rental collection is lower than the monthly installments and other costs involved in maintaining your property. In this situation, you incur losses from renting out your property.
How to identify whether your real estate investment will provide positive rental cash flow?
The answer is simple. Before you make a real estate investment, survey and identify the following mandatory elements:
- Property location
- Availability of public transportation around the property
- House price along with monthly installments
- Land tax, property tax, and maintenance charges
- Rental rates according to strategy (rent a whole house, rent rooms, or rent per individual)
Real Estate Investment Indicator 2: Cashback or Money Return
Cashback or money return in real estate investment means you get a return of money when buying property. Usually, cashback occurs when property buyers raise the selling price stated in the SP agreement higher than the price agreed by the buyer and seller. The excess money from the sale will be handed over to the buyer and it is called cashback. Why do you need cashback? Because this money will be used again to ensure your property can be rented out after purchase.
How to get cashback in real estate investment?
Step 1: Property Selection, Check Market Value and Current Selling Price of the Property.
Choose the property you want to buy and after you’ve identified the investment potential of that property. Check the market value and current selling price of that property. You are advised to use the services of a registered real estate agent to check the market value and current property selling price. Then, invest in property with a selling price lower than the market transaction price. Finally, mark up your loan to get cashback.
Step 2: Calculate Costs Involved When Buying That Property.
Calculate the costs involved when buying that property. Usually, the costs involved are:
- Real Estate Agency Fees (3.18% of selling price)
- Balance of Deposit Paid to Homeowner (6.82% of selling price)
- Legal Fees for Sale and Purchase Agreement (SP)
- Stamp Duty for Sale and Purchase Agreement (SP)
- Legal Fees for Loan Agreement
- Stamp Duty for Loan Agreement
- Property Valuation Fees
- Property Insurance Costs (MRTA / MLTA or MRTT / MLTT)
Then, add up all the above costs to know the costs involved when buying that property. Generally, the total cost above is 15% of the market value.
Step 3: Calculate the Cashback You Will Get From Real Estate Investment
To calculate your cashback, the first step is to calculate the total property financing loan you will get.
For example, this property is your first property and you get a financing margin of 90%. The market value is RM 300,000. Multiply the total market value by your financing margin. The total financing you will get is:
90% x RM 300,000 = RM 270,000
Then, subtract the Total financing with the property’s selling price and also the costs involved when buying that property.
Harga Jual Hartanah: RM 200,000
Costs Involved When Buying Property (15% of Market Value): RM 200,000 x 15% = RM 30,000
Estimated Net Cashback: RM 270,000 – (RM 200,000 + RM 30,000) = RM 40,000
Disadvantages of Cashback
The disadvantage of cashback is that there will be an increase in your monthly installment payments because you are financing the property at a high price. This will affect your real estate investment portfolio!
Measure your own ability and identify whether you can afford to pay the installment or not. Honestly, the cashback you get is not free, instead it is bank financing to you and you need to pay back that cashback with an interest rate of 4%-5% per year for a period of 30 years!
My suggestion, use the cashback money to renovate your property so that you can increase your property’s rental price. You can use this money to do a total makeover or make partitions to add extra rooms in your property.
Capital Appreciation/Increase in Property Price Value
Capital appreciation means the increase in the value of your property assets each year. This is your main weapon in your real estate investment!
For example, you bought a Mentari Court apartment at a price of RM 220,000 in 2013. n 2018, you sold the property at the market price of RM 350,000. Your property’s capital gain from 2013 to 2018 is RM 350,000 – RM 220,000 = RM 130,000.
How to identify properties with capital appreciation?
There are several factors and information that will increase the value of the property itself. These factors information are:
Property price
- When making a real estate investment, make sure the price of the property you are about to buy is lower than the usual transaction price. For example, the usual transaction price for an apartment in Cheras is RM 250,000. But you can buy a unit there at a price of RM 200,000. There you have already profited RM 50,000!
Property location
- Location also plays a role. If the property you invest in is located in a developing urban area, demand will be high every year and thus increase the value of your property price every year.
- If your property is close to main roads and public transport routes, this is a bonus for you because the demand for your property will be higher.
Record of property price increases
- This is also important as an indicator showing that your real estate investment area has had demand since a few years ago.
- You can see your property price increase record on this website: https://www.brickz.my/
